Ukraine Shale Gas Holds Promise but Jailed Princess Holds the Key

A shale gas revolution could be just the impetus for change Ukraine has been looking for. Eighty percent of Russia's natural gas exports to the EU transit through Ukraine, and a deal struck between Russia's Vladimir Putin and now jailed former Ukraine Prime Minister Yulia Tymoshenko settled Ukraine on the short end of the stick. Ukraine currently relies heavily on Russian natgas imports and the disastrous 2009 natural gas accord between Putin and Tymoshenko has Ukraine paying much more than other European customers farther down the supply chain.

Ukraine pays 40% more than does Italy and 20% more than Germany for Russian natural gas. In addition, Ukraine receives a transit fee pegged at half the transit rate for Slovakia and Hungary. Tymoshenko was jailed for the 10-year deal and the current Yanukovych administration has high hopes of convincing Moscow to re-negotiate. Government subsidies for home heat are in place in Ukraine, but officials have urged Kiev to pass more of the expense to end-users.

Explorations in the Ukraine shale may turn the tables and hedge natural gas costs, allowing Ukraine increased energy independence. According to Taras Kuzio, head of the Ukraine Policy Forum at Johns Hopkins University, "The shale gas revolution represents a strategic milestone in Ukraine's new drive for energy independence. Yanukovych's economic nationalism may yet prove to be more constructive than ethno-cultural nationalism promoted so avidly by his predecessor Yushchenko… It is even more of a paradox that it is now the Viktor Yanukovych administration, which has traditionally been viewed as 'pro-Russian,' that is engineering a strategic breakthrough in Ukraine's energy independence."

Energy independence from Russia's Gazprom would not only help citizens of Ukraine heat their homes more cheaply, it would also encourage production of Ukraine's #1 cash crop, urea. Improved access to natural gas would also give Ukraine a leg up on LNG production, which would position that nation to spearhead what some believe will be an automotive fuel revolution.

As U.S. and Canadian companies work to help Ukraine tap into what could be vast reserves, President Yanukovych is desperate for a foot in the door at the European Union. Kiev believes it will become more geopolitically important in the eyes of Washington and Brussels if it can manage to reverse Tymoshenko's deal with Russia, which is unlikely at best.

While Ukraine looks to energy independence to legitimate itself, however, the E.U. is no more likely to budge than Putin until Tymoshenko is released. So as a shale gas revolution hints at energy independence and a chance for this bullied nation to play with the big boys, a jailed gas princess, shamed in court and run out of office, still holds the key to Ukraine's inclusion in the European Union, no matter how much natural gas they find.